The dollar/dong exchange rate is expected to remain stable in the remaining months of this year despite higher prices for the greenback since early this month, experts say.

The economic slowdown will limit the demand for foreign currency needed to import materials for production, they explain.

The exchange rate increased by some 0.8 percent since late last month to VND21,040 per dollar on June 6, the highest level since late February, before falling to VND20,940 per dollar on Wednesday afternoon, according to commercial banks.

The central bank has set the reference rate at 20,828, unchanged since December 26, its website showed. The currency is allowed to trade up to 1 percent on either side of the official rate.

Truong Van Phuoc, general director of commercial bank Eximbank, said: "The exchange rate fluctuation is quite a normal phenomenon, and will not affect economic stability."

He said commercial banks now hold ample funds in the dong as they have seen declines in loans since early this year. With the low interest rate in the interbank market, estimated at 2-3 percent, the banks do not want to use the funds for lending to other banks, but spend it on buying dollars and then offer dollar loans at rates of 4-5 percent, Phuoc explained.

The higher exchange rate seen this month was also because of increasing dollar demand among firms to repay their debts, said Le Tham Duong of the Ho Chi Minh City Banking University.

Duong said some banks are purchasing dollars to balance their foreign currency holding status. When the dong lending interest rates stood as high as 22 percent last year, some banks sold their dollar funds to increase loans in the local currency. Now, when the rate gap has narrowed, they are purchasing dollars to raise their forex holdings.

Another reason is the higher dollar demand for increasing imports of petroleum products when the sole oil refinery in the country, Dung Quat, has ceased operations since May 16 for periodic maintenance, expected to take between two and four weeks, according to the VnExpress newswire.

At that time, the refinery had over 200,000 tons of petroleum products in inventory, meeting the market demand for two weeks. The refinery produces 6.5 million tons of petroleum products a year, meeting 30 percent of the country's requirements.

Slight rise

Phuoc of Eximbank said the exchange rate will not fluctuate strongly this year, increasing by just 2-3 percent, given low demand for foreign currencies and big dollar reserves at the central bank.

Amidst economic recession, many firms have reduced production, resulting in smaller demand for dollars to import materials and equipment. This can be seen in the smaller trade deficit, he said.

Trade deficit has been reduced to $622 million or 1.5 percent of the country's export turnover in the first five months of this year, from $6.6 billion or 19 percent of export turnover in the same period last year, according to the General Statistics Office.

Vietnam's typically low foreign exchange reserves rose by around 25 percent from late 2011 to an estimated $17 billion at the end of the first quarter, the Asian Development Bank said recently.

Phuoc said the dollar demand of local people will also not increase as dong deposits are still more attractive despite the interest rate cap being cut to 9 percent on June 11 from the previous 11 percent.

Interest rates on dollar deposits now are capped at 2 percent, and expected to see no big change this year, he said. "Thus, it will be difficult for the exchange rate to rise sharply this year," Phuoc said.

The central bank has said the local currency will depreciate by 2 percent to 3 percent this year. The dong weakened 7.4 percent against the dollar last year.